The Week Ahead: What The End Of QE Means For The Individual Investor

 | Nov 02, 2014 01:18AM ET

We have a jam-packed week of earnings data, important economic news, and the mid-term elections. Surely one of these topics should be the market theme for the upcoming week.

But old habits die hard. I expect the mainstream media to parse everything through the prism of the Fed – at least for another week or so. Each new piece of data will raise the question:

What is the message for investors in the post-QE world?

Prior Theme Recap

In my last WTWA (two weeks ago) I predicted that we would be asking whether the market correction was over. Continuing my hot streak of guessing the upcoming issue, that was definitely the right question. I did not have a strong personal answer, but there were both winners and losers among those cited.

Had I been able to write last weekend, I am not sure that I would have been as successful with the theme of the week. I always plan for the week ahead, but I cannot always write about it. There were plenty of moving parts last week!

Feel free to join in my exercise in thinking about the upcoming theme. We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead.

This Week’s Theme

In general, the week of the employment report provides an easy guess about what will dominate the news. This week we also have the mid-term elections and plenty of earnings news. Normally one of those would be the theme, but I am going out on a limb. I expect all to get some play, but the media focus remains on the “old news” of the Fed and the decision to end QE. For several years the interpretation of news has been easy: What does “X” mean for Fed policy? It will take time to make a transition.

We have lived through an era where both good and bad economic news were modified by the concept that the Fed would react in the opposite direction. Have we finally reached a time when good news will be good?

I expect at least one more week of Fed fixation. Each event will raise the question: What does the end of QE mean for the individual investor?

There are several viewpoints:

  • The QE Diehards will not let go. They subscribe to a mindset where the Fed does not have a dual mandate, but a single-minded pursuit of supporting stock prices. This is true no matter which party controls the White House or the Congress, and regardless of the political affiliation of the Fed Chair. These sources expect a new round of QE if and when stock prices decline.
  • The end of QE will lead to an imminent stock market collapse. Chief proponents cited the comments from St. Louis Fed President Bullard as responsible for turning the decline in stock prices. They stuck to that story no matter what else happened.
  • QE policy had only a small effect on the economy.
  • QE has not changed that much. The most important impacts come not from ongoing purchases but from the continuing size of the balance sheet. Bill McBride displays a sophisticated understanding of this point, and he explains it well.
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Before turning to my own conclusions, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information .

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

  1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially – no politics.
  2. It is better than expectations.

The Good

There was not much news and it was mostly good.

  • Q3 GDP beat expectations with a gain of 3.5%. At first blush this is great news (Todd Sullivan posts the savvy “Davidson” who explains how this all fits, including this chart:

Reuters has a solid factual account.

  • Jim Strugger at Barron’s sees a possible breakout to new all-time highs.
  • Gas prices are falling. This implies $720/year for the average consumer (via Jeffry Bartash ).
  • Stock reaction to earnings has been positive. The beat rate continues and the stock response has been surprisingly positive. Bespoke has the story and this chart:

    • Doug Short covers both the Conference Board and University of Michigan versions.

    The Bad
    There was not very much bad news. Readers are invited to nominate ideas in the comments, but remember that we are focusing on recent developments, not a list of continuing macro concerns.

    • Durable goods orders disappointed. Internal data were also disappointing. See the full analysis from Steven Hansen at GEI .
    • Forward earnings estimates decline further. Brian Gilmartin notes the decline from growth of 9.11% to 7.87%. The earnings yield remains attractive.
    • European stress tests fail 25 out of 130 banks. (Details from See Jonathan Buck for the bright side of this story – improvement. Ed Yardeni notes the overall weakness in Europe as measured by PMIs:

    GEI has a good update .

    The Ugly

    Negative campaigning. With only a few days of attack ads left before the election, most people profess to hate the negative ads. Campaigns continue to use them because they are effective, especially with late-deciding fence sitters.

    At another time the US congressional election might be an important market story. This time is different:

    • Voters are unhappy about the economy and show a preference for Republican economic policies (The Hill ).
    • Anxiety reigns. William Galston expertly analyzes a host of non-economic issues (Politico ).
    • Nate Silver’s respected 538 gives the GOP a 201 chance of taking control of the Senate as well as padding their advantage in the House.
    • The policy impact will be small, since we have already been dealing with gridlock. Those who want to see no new policies may celebrate. Those who think action is needed can wait for two more years.

    The drumbeat of negativity affects your investing. Matt Phillips explains nicely how the overall economy is strong, yet many are not participating. We cannot help others with our investment accounts; we can only make the best choices given the economic reality. He includes a good summary of important economic indicators.

    Ebola fear is another good example. Check out this “crash course ” on how Ebola pushes every fear button in our instincts, generating emotional reactions.

    The Silver Bullet

    I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts.  Think of The Lone Ranger.

    Americans will believe anything if you provide a chart – a new scientific study reported in Businessweek . I was bombarded with “scary” chart packages for Halloween. Few sources seem to be doing the hard and thankless work of fighting this stuff. Not enough page views.

    Quant Corner

    Whether a trader or an investor, you need to understand risk. I monitor many quantitative reports and highlight the best methods in this weekly update. For more information on each source, check here .